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Managing externalities: the role of stakeholder reporting - a presentation to IIED by Pavan Sukhdev
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Managing externalities: the role of stakeholder reporting - a presentation to IIED by Pavan Sukhdev

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In this presentation to IIED as part of the organisation's Critical Themes series, Pavan Sukhdev examines the role of stakeholder reporting and its relevance to environmental economics. …

In this presentation to IIED as part of the organisation's Critical Themes series, Pavan Sukhdev examines the role of stakeholder reporting and its relevance to environmental economics.

Sukhdev is the founder and chief executive officer of GIST Advisory, a specialist consulting firm that helps governments and corporations discover, measure, value, and manage their impacts on natural and human capital. he is also the Special Adviser and Head of UNEP’s Green Economy Initiative.

Published in Economy & Finance
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  • 1. IIED, London Workshop on Business Externalities 11th March 2014 Pavan Sukhdev Founder & CEO, GIST Advisory UNEP Goodwill Ambassador Author “Corporation 2020” Managing Externalties: the role of Stakeholder Reporting
  • 2. An Ecosystem Service…. Source: NOAA  http://www.vets.ucar.edu/vg/T341/index.shtml
  • 3. US$ 2.15 trillion/ year estimated global environ- mental costs of economic activity Five sectors account for about 60% of environmental costs Source: Trucost for UNPRI, 2010. Top 3,000 Listed Companies Corporate Externalities..
  • 4. US$ 2.15 trillion/ year estimated global environ- mental costs of economic activity Five sectors account for about 60% of environmental costs Source: Trucost for UNPRI, 2010. Top 3,000 Listed Companies Corporate Externalities..
  • 5. Water Abstraction Greenhouse Gases Greenhouse Gases Natural Resources Natural Resources Natural Resources ….. Are Pushing Planetary Boundaries
  • 6. B.A.U. might not deliver ‘The Future We Want’…
  • 7. We cannot Manage what we do not Measure! Hence Stakeholder Reporting: Measuring, Reporting, & Managing Corporate Externalities...
  • 8. Three Solution Models Visible...  Buy Side Advisory  Single Leader  Sector Leadership
  • 9. Question: “Who Should do What?” for Measuring Externalities Quantifying Usage, Discovering Depend- encies & Impacts Standardizing & Valuing Impacts Disclosing Impacts in “One Report” Emissions /tCO2e Freshwater / CuM Forests L.U.C. / Ha Pollution / … Waste / … Economic Costs of Emissions, Freshwater Use, Deforestation, Pollution, Waste … Framework for Integrated Reporting of All Externalities… incl Social & Human Capital.. WBCSD… GRI… CEF… CDP, WDP… TEEB for Business Coalition & Network IIRC & Accountancy Regulators
  • 10. “Who Does What When?” Business Externalities Roadmap Stages:- Objectives Measuring Supply Chain Impacts (quantities) for all significant environmental impacts: Emissions, Freshwater extraction, Land use change , Pollution, Waste Valuing all material corporate supply chain externalities due to Emissions, Freshwater extraction, Land use change, Pollution, & Waste. (Note: non-environmental drivers of Human/ Social Capital impacts out of scope) Integrated Reporting of All material Externalities from all business activities, for Internal Management AND Disclosure of Externalities Deliverables 1. Guidelines for discovering & quantifying all third-party impacts 2. Road-Tests 3. LCA Inventories & other applicable databases 1. Valuation Framework 2. Valuation Pilots / Road-Tests 3. Sector-wise Valuation Methodologies 4. Sector-wise Valuation Standards 5. Open-source Valuation Database Reporting Framework for All externalities for both (a) internal management and investor use (b) Financial disclosure Timelines 1. Guidelines : Some sectors done (ISO 14040-44 w/ Product Category Rules) or ongoing 2. Road-Tests : ongoing 3. LCA & other Databases: EU-LCA Platform (ILCD) guidance done; 1. Valuation Framework: May 2013 2. Valuation Pilots / Road-Tests: ongoing 3. Valuation Methodologies: 2014 onwards 4. Valuation Standards: 2015 onwards 5. Open-source Valuation Database: 2014 onwards (a) April 2013 – Dec 2013 (b) to be decided Responsibilities (NOTE : this list is not exclusive - mainly Coalition Members & Secretariat who have expressed interest) 1. Guidelines: GRI, WBCSD/ WRI, CEF, CDP (carbon), WDP (water), etc 2. Road-Tests: WBCSD, B Team 3. LCA Databases: Commercial LCA providers; Industry Assoc’s, Env. Ministries, Pollution Control Boards, Public open-source databases (eg: EU LCA Platforms - ELCD, ILCD); etc 1. Framework: TEEB4BC 2. Pilots / Road-Tests: B Team, other leaders 3. Methodologies (i) Development: B Team, Industry Assoc'ns, valuation experts (ii) Peer Review: WBCSD, GRI, WWF, IUCN (iii) Neutral Evaluation: TEEB4BC 4. Standards: GRI, ISO, CEN, CDSB, TEEB4BC, WBCSD/WRI, SASB 5. Open-source Database : TEEB4BC, Commercial LCA providers, IT Advisers (a) IIRC, GRI, etc (b) ICAEW, GRI, SASB, National Accountancy Regulators & IASB Quantifying Impacts Economic Valuation Integrated Reporting
  • 11. Why Stakeholder Reporting? Business today depends on, and/or has impacts on, ALL dimensions of private & public wealth… but.. EXAMPLES Physical Capital Human Capital Social Capital Natural Capital Private Ownership - Factories - Buildings - Securities - Cash - Health - Education - Job Skills - Gardens - Fields - Forests Community Ownership * (club goods) - Community Centres - Community Schools - Traditional knowledge - Community Norms and Customs - Community Forests - Grazing Commons Public Ownership * (public goods) - Roads - Bridges - Public databases - Non-patent knowledge - Law & Order - Taxation - Social Equity & Inclusion - High Seas fisheries - National Parks/ Forests * Creating community wealth and public wealth creates “shared value”
  • 12. Why Stakeholder Reporting? Business today generally measures & reports only shareholder wealth impacts: private physical capital EXAMPLES Physical Capital Human Capital Social Capital Natural Capital Private Ownership - Factories - Buildings - Securities - Cash - Health - Education - Job Skills - Gardens - Fields - Forests Community Ownership (club goods) - Community Centres - Community Schools - Traditional knowledge - Community Norms and Customs - Community Forests - Grazing Commons Public Ownership (public goods) - Roads - Bridges - Public databases - Non-patent knowledge - Law & Order - Taxation - Social Equity & Inclusion - High Seas fisheries - National Parks/ Forests
  • 13. Why Stakeholder Reporting? Business for a sustainable tomorrow – will measure & report on ALL dimensions of its impacts … EXAMPLES Physical Capital Human Capital Social Capital Natural Capital Private Ownership - Factories - Buildings - Securities - Cash - Health - Education - Job Skills - Gardens - Fields - Forests Community Ownership * (club goods) - Community Centres - Community Schools - Traditional knowledge - Community Norms and Customs - Community Forests - Grazing Commons Public Ownership * (public goods) - Roads - Bridges - Public databases - Non-patent knowledge - Law & Order - Taxation - Social Equity & Inclusion - High Seas fisheries - National Parks/ Forests
  • 14. How Stakeholder Reporting? GIST 360 ™ Assessment ….. Financial Value Addition Human Capital Externalities (“HCX”) Social Capital Externalities (“SCX”) Natural Capital Externalities (“NCX”) Measuring “Value Addition” holistically, including all material Externalities
  • 15. In evaluating third-party impacts across these categories of capital, we find that there are eleven major drivers of externalities arising from typical business activities, which most commonly generate the most significant third-party impacts. Valuation Framework Based on Drivers Environmental Drivers GHG emissions Freshwater extraction Waste generation Land-use change Air pollution Land & Water pollution Human Capital Drivers Employee training programs Employee health and safety (EHS) standards Social Capital Drivers CSR programs Business model and supply chain features Company policies
  • 16. Example: How can Environmental Impacts (NCX) be valued for Cement Industry?
  • 17. WORLD CEMENT PRODUCTION = 3.3 BILLION TONNES (2010) Source : CEMBUREAU Example: Cement Sector
  • 18. Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 1: Understand Processes Natural Capital Externalities
  • 19. Pollutants emitted from cradle to gate for 1 kg of cement CO2 (g/kg-cement) 812 SO2 (g/kg-cement) 0.63 NOX (g/kg-cement) 2.5 Dust (g-SPM/kg-cement) 1.5 Total Greenhouse Effect (g/kg-cement) 817a Total Acidification (g/kg-cement) 2.4b Total Eutrophication (g-PO4/kg-cement) 0.33c Total Winter Smog (g-SPM/kg-cement) 2.1d These results show Cradle to Gate Emissions Averaged from 5 EU Cement Type-I Products. The main constituents emitted from the production of cement are CO2, SO2, and NOX (Source: CEMBUREAU) a) Includes minor contributions from CH4, N2O or HF b) Includes minor contributions from HCl and NH3 c) Includes minor contributions from NH3, N-tot and COD d) Includes minor contributions from soot Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 2: Understand Drivers & Outcomes Natural Capital Externalities
  • 20. Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 3: Life-Cycle Analyses (LCA’s) Natural Capital Externalities
  • 21. June 2013 Natural Capital Externalities (NCX) 21 Natural Capital Externalities
  • 22. 22 LCA’s enable quantification of major environmental drivers of business, which materially impact natural capital, & also human capital (health) and social capital (quality of life). Trucost classifies environmental drivers of corporate externalities into six high-level eKPIs across major categories of unpriced natural capital dependencies and impacts. Each of these impacts can be valued in economic terms. Drivers Impacts (examples) 1. GHG emissions Climate change damage 2. Air pollution Health damage 3. Land and water pollution Eutrophication 4. Land use change Ecosystem service losses 5. Waste generation Dis-amenities 6. Freshwater extraction Pre-emption from others use These six eKPIs reflect the channels through which companies’ impact natural capital and match the categories that targets are established for, consequently informing strategies and initiatives. These categories are also drivers of, and impacted by, regulations. GIST 360™ NCX™ Trucost “EP&L” and “eKPI’s” Natural Capital Externalities Natural Capital Externalities
  • 23. 23  Outcomes: The typical EP&L study will quantify the natural capital embedded in direct and supply chain operations  Example:  “Direct” or “gate-to-gate” phase refers to the processes that take place within factory premises “Indirect” could (for example ) comprise energy, materials, transportation “Materials” refers to the sourcing and processing of material inputs “Energy” refers to the production of energy needed along the supply chain “Upstream transportation” refers to the transportation of material inputs to the factory NOTE: Trucost’s valuation builds on a library of 1,000+ peer-reviewed articles and reports, as well as government studies. Natural Capital Externalities GIST 360™ NCX™ Trucost “EP&L” and “eKPI’s” Natural Capital Externalities
  • 24. Environmental Externalities Measuring & Disclosing : PUMA Source: PPR /PUMA Press Release, 16th Nov 2011 Natural Capital Externalities
  • 25. Can Externalities also be Positive?
  • 26. YES: Positive Externalities can result from Corporations business models & policies... Example 1: Infosys, +ve HCX Wxample 2: Natura, +ve SCX
  • 27. Mysore Campus, Infosys - World-class Training for 30,000 p.a. - Attrition feeds trained IT talent to the world - Positive externalities over US$ 1 billion p.a. PositiveHumanCapitalExternalities HumanCapitalFactoryforITTalent:INFOSYS Human Capital Externalities
  • 28. • “Human Capital refers to the knowledge, skills, competences, and other attributes embodied in individuals that are relevant to economic activity” (OECD, 1998). • Among the most important assets and a key determinant of country’s overall economic performance • Among the most important assets for any business and a key determinant of business performance • One of the “Six Capitals” in IIRC’s recent consultation draft of their “Integrated Reporting” framework (<IR>, 2013) • Neither national accounts nor business accounts reflect human capital creation or loss, nor human capital externalities What is “Human Capital”? Human Capital Externalities
  • 29. HCXTM Model: Results from Infosys Annual Report 2012 Human Capital Externalities
  • 30. • Social Capital can be defined (source: IIRC) as “the institutions and relationships established within and between communities, groups of stakeholders and other networks, and the ability to share information, to enhance individual and collective well-being. Social and relationship capital includes: • Shared norms & common values and behaviours • Key relationships and the trust and loyalty that an organization has developed and strives to build and protect with customers, suppliers and business partners • An organization’s social licence to operate” • Some business models, company policies and CSR activities are designed to improve such institutions and relationships, and in doing so, will usually generate positive externalities (eg: improvements in public health, societal job creation, environmental conditions, etc.). What is “Social Capital”? Social Capital Externalities
  • 31. Source: http://www.managementexchange.com/story/innovation-in-well-being http://totallybeautyaddict.fr/mon-jolieapero-chez-natura-brasil/ PositiveSocialCapitalExternalities BusinessModel withSocial Benefits:NATURA 1.4 million housewives earn 33% sales commission - Economic security improves family & social status for women - Training is used to sell other companies’ goods - Greater proportion of household expenditure on health & education - Increased labour market flexibility and efficiency Social Capital Externalities
  • 32. GIST 360™ comprises four assessments:-  Reported Value Addition (using Company Financial Statements)  Human Capital Externality valuation (using our HCX™ Model)  Social Capital Externality valuation (using context-specific valuation methods – SCX™)  Natural Capital Externalities valuation (using Trucost - EP&L) Measuring Externalities for a “Stakeholder Value Added” Report
  • 33. www.corp2020.com
  • 34. http://www.youtube.com/watch?v=J qk0ad5LKlI A Non-Economist Explains ‘Corporation 2020’….
  • 35. Thank You ! www.gistadvisory.com www.corp2020.com Pavan Sukhdev, Founder & CEO, GIST Advisory pavan@gistadvisory.com